Nuts and Bolts of Forming For-Profit and Nonprofit Entities in Virginia

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This is a presentation given in February 2010 to a group of tennis league coordinators on the basics of forming for-profit business entities and nonprofit entities in Virginia.

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Nuts and Bolts of Forming For-Profit and Nonprofit Entities in Virginia

  1. 1. USTA/VIRGINIA TENNIS<br />AREA LEAGUE COORDINATOR WORKSHOP<br />February 13, 2010<br />NUTS AND BOLTS OF <br />ENTITY FORMATIONS IN VIRGINIA<br />Eric C. Perkins, Esq.<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  2. 2. STATUS OF USTA LEAGUE COORDINATORS<br />HOBBY: Labor of love<br />BUSINESS: Profit motive<br />What’s the Difference? Business income is subject to self-employment tax. Income from a hobby is not. Business losses can be used to offset income from other sources, but losses from a hobby cannot. Self-employment tax is the Social Security and Medicare tax that gets paid by people who work for themselves, and is paid on a self-employed person’s net earnings.<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  3. 3. Reasons to Conduct Business Activity Through a Separate Legal Entity<br />Limited Liability Protection<br />Tax Efficiency<br />Perpetual Life<br />Professionalism/Sophistication<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  4. 4. Choice of Entity<br />Too many available choices under Virginia law<br />Corporation or LLC most common choices for small business<br />Creatures of State Law<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  5. 5. WHY LLCs?<br />Simplicity and Flexibility<br />Less Paperwork<br />Lower Annual Fee ($50)<br />Single-Member LLCs are disregarded entities for federal income tax purposes (no separate tax returns)<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  6. 6. Forming a Virginia LLC<br />Articles of Organization<br />Distinctive Name<br />Registered Agent/Office<br />Principal Office<br />$100 Filing Fee<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  7. 7. Forming a Virginia LLC<br />Operating Agreement<br />Management<br />Operation<br />Economics<br />Voting<br />Dissolution<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  8. 8. Forming a Virginia LLC<br />Form SS-4 (Federal EIN)<br />Not legally required for SMLLCs<br />Often required by banks when opening bank account for the LLC<br />Recommended if LLC will have employees<br />Apply online at: http://www.irs.gov/businesses/small/article/0,,id=102767,00.html<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  9. 9. Forming a Virginia LLC<br />Virginia Form R-1<br />State Taxpayer Registration<br />Apply online at: www.tax.virginia.gov<br /><ul><li>Local Business License (City or County)
  10. 10. Home Office? Check local zoning and HOA requirements</li></ul>PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  11. 11. Respect Your LLC<br />No commingling of personal and business assets<br />Maintain good standing with SCC (pay annual fee on time)<br />Observe proper entity formalities (signature blocks)<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  12. 12. Forming a Virginia LLC<br />Articles of Organization<br />Distinctive Name<br />Registered Agent/Office<br />Principal Office<br />Filing Fee is $100<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  13. 13. TERMINOLOGY<br />Nonprofit—A state law concept usually defined by statute in reference to the formation of nonprofit or nonstock entities. Surplus funds not distributed to owners.<br />Tax Exempt—An Internal Revenue Code concept relating to an entity’s status (recognized by the IRS) as exempt from the requirement to pay income tax.<br />POINT: Not all nonprofits are tax exempt.<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  14. 14. Categories of Tax-Exempt Status<br />Over two dozen types of exempt organizations under Section 501(c) of Internal Revenue Code.<br />Section 501(c)(3) is most popular<br />Charitable, educational, religious, literary, scientific, fosters national or international amateur sports, prevention of cruelty to animals or children.<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  15. 15. Benefits of 501(c)(3) Status<br />Exempt from income tax (possibly eligible for sales and property tax exemptions too)<br />Donations are tax-deductible by donors<br />Eligibility for foundation grants<br />USPS postage discounts<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  16. 16. TRUE OR FALSE<br />The USTA is a Section 501(c)(3) organization.<br />FALSE <br />The USTA is a Section 501(c)(6) trade association.<br />POP QUIZ<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  17. 17. POP QUIZ<br />TRUE OR FALSE<br />The USTA/Mid-Atlantic Section is a <br />Section 501(c)(3) organization.<br />FALSE <br />USTA/MAS is a Section 501(c)(4) social welfare organization.<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  18. 18. Structuring Options for New Nonprofits<br />Fiscal Agent/Sponsorship Relationship<br />Unincorporated Association<br />Charitable Trust<br />Nonstock Corporation<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  19. 19. Advantages of a Nonstock Corporation<br />Limited liability protection<br />Perpetual life<br />Statutory and Judicial Guidance<br />Most common <br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  20. 20. Benefits of Working with an Existing Entity<br />Avoid start-up costs<br />Greater efficiencies/synergy from a combined effort<br />Opportunity to gain experience and expertise<br />Leveraging existing goodwill and networks <br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  21. 21. What is Fiscal Sponsorship?<br />Contractual relationship between an existing 501(c)(3) entity and an individual or group that lacks tax-exempt status but wants to pursue an project or program consistent with a tax-exempt purpose.<br />Allows one to piggy back on another’s tax-exempt status, usually in exchange for an administrative fee.<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  22. 22. Example of a Fiscal Sponsorship Relationship<br />Fiscal sponsor:Community Tennis Association with 501(c)(3) status <br />Sponsored group:Local tennis league coordinators<br />Benefit: League activities would fall under the CTA’s umbrella, but coordinators could maintain day-to-day control over their leagues. <br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  23. 23. Form 1023<br />About 75,000 are filed each year<br />Filing Fee: $400 or $850 (tied to $10,000 gross proceeds threshhold)<br />Needs to be filed within 15 months of formation (an extra 12-month grace period is generally allowed)<br />Generally takes 2-3 months to get a response<br />Cyber Assistant Scheduled to Debut in 2010!<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  24. 24. Key Form 1023 Questions<br />Describe your past, present, and planned activities in narrative form.<br />List names, titles, addresses, and compensation of all directors, officers, five highest compensated employees and independent contractors (if over $50,000 per year).<br />Explain different relationships that could present conflicts of interest or risk of private inurement/private benefit.<br />Fundraising plans.<br />Current financials and proposed budget (4 years for new organizations)<br />Copies of formation documents, conflict of interest policy, etc.<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  25. 25. IRS Determination Letter<br />What does it mean? The determination letter means that the IRS has concluded that your Form 1023 application and supporting documents meet the applicable exemption requirements of the section under which it is claiming exemption.<br />What do I do with it? Make about a dozen copies of the letter and keep them with your corporate records. Scan and save an electronic copy as well. Government agencies, grant makers, and significant donors often will ask to see a copy of a nonprofit organization’s determination letter.<br />What is IRS Publication 78?Publication 78 is an official IRS list of organizations to which charitable contributions are deductible for tax purposes.The list is updated quarterly and can be viewed online at www.irs.gov.<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  26. 26. State Charitable Solicitation Compliance<br />Virginia regulates the solicitation of charitable contributions by nonprofits and paid fundraising solicitors<br />Annual registration requirement (or exemption filing), fee requirement, and project-specific permit requirements (e.g., for charitable gaming activities like bingo and raffles).<br />Good Resource: National Association of State Charity Officials<br />www.nasconet.org<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  27. 27. Annual IRS Reporting<br />Form 990<br />Annual gross revenue of at least $500,000<br />Total assets of at least $1,250,000<br />Form 990-EZ<br />Annual gross revenue between $25,000 and $500,000<br />Total assets less than $1,250,000<br />Form 990N (the ePostcard)(online filing)<br />Annual gross revenue less than $25,000<br />NOTE: These numbers adjust annually <br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />
  28. 28. You Are Now a Virginia Business and Nonprofit Entity Guru!<br />PERKINS LAW, PLLC4870 Sadler Road, Suite 300Glen Allen, VA 23060<br />Phone: 804-205-5162<br />Email: eric@ericperkinslaw.com<br />www.ericperkinslaw.com<br />

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